Aluminum squeeze deepens as spreads tighten and inventories drop

The aluminum market is facing a deepening shortage as the closure of the Strait of Hormuz throttles supply, with spot prices for the metal spiking while exchange inventories slump.

Aluminum buyers globally have been rocked by the conflict in the Gulf, which accounts for nearly 10% of global supply. While there is renewed optimism about a resolution to the tensions, the prolonged shutdown of the strait and the direct attacks on smelters in the region have prompted warnings that the industry is facing its biggest shortages in decades.

There were fresh signs of supply stress on Friday, as spot aluminum prices surged to a $97-a-ton premium to three-month futures on the London Metal Exchange, reaching the highest level since 2007. 

Premiums for spot contracts — known as backwardation — are a classic sign that supply is running short of demand, and the recent surge in the spread comes as readily available inventories on the LME approach historically low levels.

Combined stockpiles tracked by the LME, CME Group, and the Shanghai Futures Exchange would cover global supply for less than five days, according to Bloomberg calculations. That’s the lowest level of cover of the six main metals traded on the LME, and represents a major shift for an industry that’s historically been plagued by oversupply.

Three-month aluminum prices have rallied more than 16% since the start of the conflict, and rose 0.2% to settle at $3,666.50 a ton on the LME on Friday. Prices hit a four-year high above $3,700 a ton earlier in the week, and banks including JPMorgan and Citigroup have predicted a move to $4,000 a ton. 

All other base metals except tin declined. 

(By Mark Burton)